Life Insurers Looking for Growth
Despite improved financial strength, we still view the industry unfavorably.
The fourth-quarter earnings reports of the domestic life insurance companies we cover were generally quite solid. This is particularly notable considering the strength of last year's quarter, one in which markets were rallying significantly after lows reached earlier in the year during the financial crisis. As life insurance companies increasingly relied on variable annuities and other spread-based products to drive revenue and profits, their balance sheets became more exposed to equity market fluctuations. This exposure, along with the investments in the companies' portfolios, severely damaged the balance sheets of many life insurance firms. As markets have improved in the last years, results have bounced back and equity ratios have stabilized. Therefore, the year-over-year improvements from many of the life insurance companies is not surprising given the more than 10% increase in the S&P 500 during the quarter.
Most of the life insurers raised equity during the crisis--many at severely dilutive prices--but capital positions are now back to near pre-crisis levels. On an asset-weighted basis (to avoid skewing the results by the relatively small but highly capitalized Torchmark (TMK)), the average equity/assets ratio, excluding separate accounts, now stands at approximately 10%. This is much higher than the single-digit levels reported during the depths of the financial crisis, but it is important to note that life insurance companies continue to exhibit a large amount of leverage. Although some of the companies are attempting to lower the risk of their operations and balance sheet going forward, we believe it will be necessary for life insurers to hold higher capital levels than they had in the past. Over time, this will not only fortify financial strength, but will also put pressure on ROEs.
Drew Woodbury does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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